top of page

The New Single-Family Rental Playbook

Climate and Decarbonization

US home energy consumption generates 622.5 million metric tons (MT) of greenhouse gas emissions annually. If US homes were a country, that would make them the 6th largest contributor to emissions globally.


Sixth place won’t get you on the podium at the olympics, but assuredly deserves its fair share of attention when it comes to combating carbon emissions. Institutional single-family rental housing stock may only represent a minority of the total housing stock, but its operators have an unprecedented opportunity to serve as a massive accelerant in decarbonizing existing housing stock at scale (think millions of metric tons of CO2e annually). Moreover, operators who leverage a holistic climate strategy to future-proof their assets will deliver superior investor returns over the next decade.


Climate and sustainability factors will be the largest drivers of single-family rental returns over the next decade for two reasons:


  • Climate impact will massively shift supply and demand dynamics for where populations desire to and frankly can live.

  • Operating and cost to maintain performance will skew favorably towards operators who adopt climate mitigation and decarbonization strategies to their portfolios.



SFR Overview

Exiting the Global Financial Crisis, we witnessed a massive increase in the institutionalization of single-family rentals (SFR). Since then, the recipe for success has largely looked the same: focus on undersupplied high growth markets, mainly in the Sun Belt; buy three or four bedroom homes in the $200,000 - $450,000 range; invest $20,000-40,000 in renovation costs to make them clean, safe and functional; lease them up as quickly as possible; raise rents annually; try (and struggle) to keep maintenance costs down; and take advantage of low favorable debt markets to leverage portfolios at favorable economics. 


Taking a look at the current state of institutional SFR,  the three publicly traded SFR platforms Invitation Homes, American Homes 4 Rent, and Tricon have 83%, 70% and 92% of their homes in the sunbelt respectively. This has undoubtedly been the sound and winning strategy over the last ten years.  


But the winning playbook of the last decade isn’t always going to be the winning playbook of the next one, in fact, it rarely is. The next iteration of single-family rentals will need to operate under an evolved playbook to drive similar impact for residents and investors.


The New Playbook

Over the next ten years, single-family rental operators, institutional and retail alike, will be best served to integrate a holistic climate strategy across their core business:


  • Market and submarket deployment strategies

  • Decarbonization strategies

  • Asset operating performance

  • Sustainable financing


While each of these sections deserves its own deep dive, we will highlight each section.


Market & Submarket Deployment Strategies

The general geographic market selection strategy to date has focused largely on broader supply/demand dynamics:


  • Median home price and growth rate

  • Median rent price and growth

  • Historic and future household/population growth 

  • Median household income


When analyzing these metrics alone, markets like Atlanta, Dallas, Orlando, Charlotte, Jacksonville and Houston will find their way to the top. But are these forecast and deployment rankings appropriately taking into account the impact of rising sea-levels and extreme weather set to escalate over the next decade? 


By 2100 rising sea-levels alone are set to displace approximately 13 million people according to researchers. This doesn’t even factor in displacement from factors such as wildfire, flooding, and extreme weather. 


Markets that become increasingly hotter, prone to flooding, and/or wildfires are going to face consumer demand challenges as renters decide they either can no longer afford or no longer desire to live in these worsening conditions.


While the impacts of shifting climate and extreme weather might not be baked into in-place yields (today’s home prices, rents, and operating expenses), they’ll undoubtedly show up in the operating performances of these assets over their hold period (lower rent growth and home price appreciation; higher resident turnover, insurance cost, maintenance). Conversely, markets with a more favorable climate outlook are likely being undervalued in today’s market pricing and are positioned to receive increased demand and desirability from renters in the coming years.


The takeaway here isn’t to throw away existing market ranking and deployment strategies, it’s to think more holistically. It’s time to incorporate climate into these market analyses given its massive impact on supply and demand dynamics over the next few decades. With the right toolkit of data, capital deployment will likely shift toward markets that have less variable climate outlooks and give operators an opportunity to differentiate amongst competitors.


Decarbonization Strategies

The average single-family rental owner will put around $20,000-40,000 into renovations to a home at the time of acquisition. Renovations typically focus on mechanicals (i.e., HVAC, water heater), flooring, roofing, and cosmetic upgrades to achieve a clean, safe, and functional standard while reflecting regional consumer preferences.


Generally not accounted for in those renovations is the fact that the average single-family home emits 7.8 metric tons of CO2e annually or about 78 metric tons CO2e over a 10-year hold period. Energy efficient home upgrades have the potential to significantly reduce those emissions. Installations of heat pumps, smart thermostats, heat pump water heaters and certain weatherization projects are four projects that have the potential to reduce emissions by up to 40% on average, and have the added benefit of reducing energy bills by a similar amount (again, this varies on a home to home basis). Those savings start to add up to real impact. For example, a 10,000 home portfolio could demonstrate measured reductions of 30,000 metric tons CO2e annually.


The challenge? Upfront costs. These upgrades typically will run SFR operators about $10,000 more than a traditional upgrade. The $20,000-$40,000 in renovations likely shifts to $30,000-50,000, creating a drag on unit economics; moreover, the impact on energy bill savings doesn’t impact your net operating income as the residents are responsible for energy bills.


The solution? Reframe the discussion. Instead of thinking of home energy upgrades as a drag on up-front costs, think of them as an investment in insulating your assets from future climate and regulatory risk.


Commercial real estate has been leading the charge on decarbonization efforts over the last five years and it's not hard to see the same analogs coming to residential. A confluence of regulatory pressures to track and reduce emissions, consumer demand for sustainable features, and shifting and variable energy markets create a clear business case for the electrification of housing stock.


The efficacy of home energy upgrades isn’t the same from geography to geography or even from home  to home. The best and most cost-friendly option for your portfolio is to understand the different ROI and emissions reduction opportunities at the asset-level in order to identify which assets and upgrades are optimal for piloting home energy upgrades on future acquisitions or during turnover.


Markets like Ohio, Michigan, and New Hampshire with older housing stock, high percentage of homes heated by oil or natural gas, and relatively expensive natural gas costs compared to electricity are prime candidates for decarbonization strategies that will optimize emissions and energy bill reductions and more importantly, ensure the assets avoid having obsolete equipment at the time of sale.


Asset Operating Performance

The largest drivers on operating performance generally revolve around taxes, cost to maintain, and insurance costs. Nobody wants to talk about taxes, so we won't, but climate will undoubtedly be a driver for the other two.


"Cost to maintain" generally encompasses repairs and maintenance while the home is occupied by a renter and turnover costs when the resident leaves. The maintenance costs can vary greatly from home to home and on a location basis. Maintenance costs occur for a variety of reasons: user error (i.e., flushing things they shouldn't down the toilet) and mechanical issues (things break when it's really hot or really cold). By better understanding the correlation between weather and maintenance calls, operators can better forecast expected maintenance costs. Markets with projected increases in extreme weather are likely to have higher future maintenance costs, and thus, current forecasts overestimate their predicted financial returns. 


Additionally, turnover remains another driver of operating costs. People move for a variety of reasons, many of which are out of the operator's control, but what about the reasons renters stay? SFR operators can leverage the previously mentioned decarbonization strategies to decrease turnover by tracking and communicating the amount residents save on energy bills through home energy upgrades.


Will residents stay longer because they save $1,000 per year on their energy bills? We don't know, but we can't imagine they'd move because of it.


Insurance costs are a little more straightforward. Insurance costs have been rising across the country over the last few years but have been accelerating more in markets with extreme weather events. In Florida, for example, hurricane damage cost the state between 7.5% and 10% of state GDP in 2022. Unsurprisingly, Florida has seen the largest increase in insurance premiums over the last five years. Think of insurance premiums as a more subtle descriptor of where markets are heading. If insurance companies are charging more, it's because they're underwriting greater weather claims in the future. 


Sustainable Financing

There is a growing desire and shift from financial institutions, be it on the equity or debt side, to incorporate ESG metrics into investment mandates and focus. More specifically, embedding sustainability into financial metrics has become a focus for Fannie Mae and Freddie Mac as they have adopted green mortgages for energy-efficient single-family and multifamily housing over recent years. Since 2019, the GSEs have issued nearly $70 billion in Green multifamily mortgage-backed securities and over $6 billion in Green single-family MBS.


While the market for green financial products is still evolving, there are a handful of opportunities that SFR operators have today to be better positioned to capitalize on the evolving landscape:


  • Start to benchmark carbon emissions and energy bill profiles of homes pre-acquisition and post-rehab. Why? This enables operators to articulate the environmental and social impact of energy-efficient renovations to investors.

  • Identify and credential existing portfolio assets that have energy-efficient features or meet one of the many energy-efficiency certifications. Why? This will allow for proper asset performance tracking against your core portfolio and identify assets that may qualify for sustainability-linked financing.

  • Track the cost and impact of energy-efficient upgrades that are “above and beyond” the traditional home renovation budget. Why? By showing the “additionality” of the home upgrades, these projects may qualify as carbon offset projects that can drive ancillary revenue to your portfolio and mitigate increased renovation costs.



Bringing it all together

Does all this mean that market forces and capital market financing will line up neatly immediately? It will likely take time, as all transformations do. But the train is leaving the station, whether operators act or not.


The future playbook will remain data driven, but that data set is expanding with climate and decarbonization strategies embedded throughout the value-chain. Some simple, pragmatic steps to get started include:


  • Market selection - start integrating climate metrics into market selection tooling; better understand forward-looking views on extreme weather, migration, and insurance costs

  • Benchmark emissions - start benchmarking and tracking the emissions profile of both your existing portfolio and acquisition opportunities

  • Communicate energy savings to your residents - start tracking energy bills and benchmark against housing stock to communicate energy bill savings to your residents

  • Credential energy efficiency - start tracking homes that may qualify for home energy certifications and start to quantify the impact of your home upgrades

  • Track cost to maintain and performance of assets - start tracking asset maintenance costs against climate metrics to better understand your historical correlations


The future-state? The culmination of better market selection, decarbonization strategies, better consumer alignment, and potentially cheaper financing will deliver superior returns relative to traditional single-family rental investments, all while playing a critical role in decarbonizing the largest asset class in the world.



How Homegrown can help

At Homegrown, we partner with single-family rental operators and investors, mortgage lenders, and short-term rental platforms to provide the essential data and tooling to benchmark and track emissions of their single-family rental portfolios alongside a suite of tools designed to optimize their portfolio and unlock financial incentives.


Specifically, we partner with single-family rental landlords to: 

  • Benchmark and track carbon emissions at the asset and portfolio level

  • Identify highest ROI and emissions reduction for home energy upgrades

  • Understand physical climate risk and track cost to maintain against climate forecasts

  • Educate renters about energy bill savings and how to operate energy-efficient technologies

  • Access sustainable financing for their energy-efficient portfolios


 

Sources: This article includes information sourced from and published by the EPA, EIA RECS, US Census Bureau, National Centers for Environmental Information, RMI, Fannie Mae, Freddie Mac, ValuePenguin; research studies published by PNAS, PLOS One, Nature Climate Change; and Q3 2023 earnings reports.

Comments


bottom of page